Why trader is selling calls in Mechel

optionMONSTER

Traders see little hope for Russian steel maker Mechel.

optionMONSTER's monitoring programs detected the sale of more than 15,000 January 3 calls for $0.50. Volume was more than 60 times the previous open interest at the strike, indicating that new positions were initiated.

The investor is now effectively short MTL at $3 through early next year. If it remains below that level, the trader will keep the $0.50 as the contracts will expire worthless. Above it, he or she will face smaller profits or potential losses.

MTL declined 5.17 percent to $2.75 yesterday and has lost 56 percent of its value in the last year. The stock has been hammered by the double whammy of weak metal demand and bearish sentiment toward emerging markets. It's now back to levels last seen in early 2009.

The advantage of selling calls rather than shorting the stock is that option trade will make money even if shares move sideways or rise only modestly. (See our Education section for more on how to make money from the passage of time rather than a move in a specific direction.)

Total option volume in MTL was 71 times greater than average in the session.


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